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Globalization and Welfare Policy

Globalization and Welfare Policy. Bertil Holmlund Department of Economics Uppsala University Workshop at SNS Stockholm 4 October 2006. Four questions. Has the rate of structural change increased? Does globalization lead to a harmonization of social security systems?

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Globalization and Welfare Policy

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  1. Globalization and Welfare Policy Bertil Holmlund Department of Economics Uppsala University Workshop at SNS Stockholm 4 October 2006

  2. Four questions • Has the rate of structural change increased? • Does globalization lead to a harmonization of social security systems? • Does international competition worsen the tradeoff between equity and efficiency? • Is the demand for income and job security increasing in income and in the rate of structural change?

  3. Q1: Has structural change increased? • Definition -- increased ”turbulence”? • An increase in the rate of depreciation of skills Evidence from data on • Employment shifts across industries • Job mobility/job tenure • Wage instability • Wage losses associated with job losses

  4. Employment shifts across industries in OECD

  5. Average elapsed tenure, 1992 and 2000 (years)

  6. Wage instability • United States • an increase in the 1980s, a decline in the 1990s (Moffitt and Gottschalk 2002) • United Kingdom • increase in earnings volatility during the 1990s (Ramos 2003) • Sweden • no trend during the 1990s (Gustavsson 2004)

  7. Job displacement and wage losses • United States (Violante 2002) • 10 percent larger losses in the 1980s compared to the 1970s • Wage growth within jobs higher in the 1980s than during the 1970s • United Kingdom (Nickell et al 2002) • Increase in earnings losses from a spell of unemployment • Sweden?

  8. Q2: Does globalization lead to a harmonization of social security systems? • Theory • The US experience • States determine social insurance programs, minimum wages… • Substantial differences in benefit generosity • Empirics for 20 OECD countries: • Unemployment insurance (UI) systems • Employment protection • Union density • Tax rates Source: Nickell et al dataset, CEP LSE

  9. UI replacement rates

  10. Benefit durations

  11. Union density

  12. Employment protection

  13. Tax wedge

  14. Q3: Does international competition worsen the tradeoff between equity and efficiency? • Labor migration sets limits on redistribution policy among wage earners • The lower end: welfare migration • The upper end: brain drain • Capital mobility sets limits on taxes on capital

  15. Q3 (b): Does international competition worsen moral hazard problems in social insurance? Example: unemployment benefits • Labor migration – welfare migration • Wage bargaining – wage moderation • Job search – search or leisure abroad?

  16. Q4: Is the demand for income and job security increasing in income and in the rate of structural change? • Optimal unemployment insurance • Some theory and simulations • A brief look at the data • Do more open economies demand more insurance in the form of • Government expenditure • Labor market regulations and insurance

  17. Unemployment insurance and income • A constant replacement rate is required in order to maintain constant unemployment along a balanced growth path • The optimal replacement rate (b) is invariant to changes in income • so the benefit level adjusts to wages: B=b*W

  18. Optimal Unemployment Insurance:The Role of Job Destruction and Labor Market Flexibility Compare Economies with low and high job destruction Higher job destruction implies higher unemployment Flexible vs less flexible labor markets Higher job destruction and higher matching efficiency Unemployment may be the same

  19. Search and matching model Fredriksson and Holmlund, JOLE 2001 Risk aversion (relative risk aversion=2) Nash bargaining over wages Uniform vs. two-tiered benefit system b is the first tier, z the second: b≥z Stochastic benefit duration

  20. Job destruction • Exogenous job destruction rate: φ vs. • Exogenous job destruction rate: 2φ

  21. Flexible vs less flexible labor markets • Job destruction rate: φ • Matching efficiency: c vs. • Job destruction rate: 2φ • Matching efficiency: 2c Matching function: H=cVaU1-a

  22. Optimal UI: Low vs high job destruction

  23. Optimal UI: Low vs high job destruction

  24. Optimal UI: Low vs high job destruction

  25. Optimal UI: flexible vs less flexbile labor markets

  26. Optimal UI: flexible vs less flexbile labor markets

  27. Optimal UI: flexible vs less flexbile labor markets

  28. Openness and government expenditure, 1980s(D Rodrik 1998)

  29. Openness and government expenditure, 2000

  30. Benefit generosity and openness (Agell 1999)

  31. Union density and openness(Agell 1999)

  32. Wage coordination and openness(Agell 1999)

  33. Wage inequality and openness (Agell 1999)

  34. Conclusions • Has the rate of structural change increased? Don’t know • Does globalization lead to a harmonization of social security systems? No • Does international competition worsen the tradeoff between equity and efficiency? Probably 4. Is the demand for income and job security increasing in income and in the rate of structural change? Probably

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